Cashing in on Cards
Getting More Business Value from Debit
More than a 1,000 times per year a European citizen goes shopping, buys a newspaper, sips a coffee or pays a bill. But only a
fraction of these is paid through banks or cards and most payments are still in cash. In times of increased travel, ubiquitous
use of technology, and rising security concerns, should banks not
strive to capture more of this everyday spending?
The banking paradigm is changing.
With traditional profit pools shrinking faster than predictions, and a contracting economy, the future mix of the
banking business is destined to change.
Investment banks are being reinvented.
Asset and wealth management, a traditional profit heavyweight for consumer
banks, are facing fundamental business
model questions with customers shifting from complex to simple models
and from actively managed to passive
products. The lending business might
be getting better margins for new business, but continues to suffer from a
substantial rise in defaults and from
deleveraging forced by regulatory concerns. Even the „safe“ life and pensions
business is under pressure due to devalued investments and lower returns.
Banks might not have a choice but
to go after the cards and payments
business. Indeed, cards and payments
are becoming quite attractive. Transactions have risen at a stable 6 percent
per year over the past decade—a solid
number in a fee business with low operational risk that requires little equity.
Moreover, although electronic payments such as credit transfers and direct
debits tend to stagnate in times of crisis,
debit card payments have proven rather
resilient both in the last downturn from
2001 to 2003 in Germany and in recent months (see figure 1). Even if there
is a slight decrease in transactions, it
will be minor compared to the 20 to
40 percent revenue decrease (or more)
across some other banking businesses
these days.
These effects are neither temporary
nor solely in the realm of regulators
and a declining economy. Companies and consumers are also taking
a more cautious approach to their
investments and financing needs.
According to ­A.T. Kearney scenarioplanning, we can expect return-onequity levels of European banks to go
down from an average pre-crisis level
Europeans
make more
than a 1,000
payments per
year — but
only a fraction
is on cards.
Most payments
are still cash.
Figure 1: Growth of Debit, Consumption and GDP
Y/Y Change
Debit value
GDP
Food
Non-food
Source: Office for National Statistics; Statistisches Bundesamt,
European Central Bank, A.T. Kearney analysis
and transaction costs are less for acquirers. With more innovation being rolled
out, namely in the contactless card and
the mobile payments space, a significant reduction in check-through-times
is expected. Safer, quicker and probably cheaper should convince more
merchants to accept cards—and more
cardholders to pay by card for their everyday purchases.
Which card will benefit most from
this opportunity? Clearly, the innovation
benefits apply equally to credit, charge
or debit cards. But the queuing and cost
advantages are most relevant for everyday payments in supermarkets, drugstores, kiosks and for transportation,
just to name a few. Europeans tend to
pay with debit rather than credit cards
at these outlets, so clearly debit plays a
prominent role in capturing the opportunity. How can banks ensure that their
cardholders follow their ambitions? And
is there more to get from debit?
1
of 17 percent (2003-2007) to a range
from 5 to 9 percent. This steep decline
not only raises the importance of stable
areas such as payments, but also triggers
intentions to grow these businesses.
White Space for Cards
There is some good news for banks.
For one thing, even in times of downturn, people continue to consume.
While people might cut back on luxury items, travel and white or brown
goods, they continue to purchase and
use „daily“ goods and services. They
might be buying smaller ticket items,
but not necessarily fewer. Also, out
of more than 1,000 payment transactions per year, only a fraction is done
through banks or cards today. Around
60 to 80 percent of these transactions
are paid in cash (see figure 2). In some
markets, such as Italy, the percentage
is even higher. Overall, the trend is in
favor of cards.
This presents a huge „white space“
opportunity for banks and other finan-
2
cial institutions. Around half of these
payments are low-value payments below €15 to €20, an area that has traditionally not been a focus of banks.
They include everyday payments
from newspapers to food and coffee
to pharmacies, where in many markets neither customers nor merchants
have been „educated“ that cards could
be used. Sometimes merchants do not
accept cards or people reject using
cards for low-value purchases for educational or pricing reasons. But initiatives are underway to change this
picture for the better.
The EMV roll-out across Europe is
a great opportunity to broaden card
acceptance to these categories. Indeed, some argue that EMV, the global standard for credit and debit cards
based on chip card technology, will
play out best in these merchant segments. That‘s because they are safer in
comparison to magnetic stripe cards,
have faster authorization times with
a possibility for offline authorization,
Exploiting the Marketing
Value of Debit
Debit cards are more than a utility. They
have a legacy behind them, first as guarantee cards for checks and later for cash
withdrawals at ATMs. There has been
little focus on marketing a debit card as
a product by itself. In fact, consumer research shows the extent to which this
legacy is still shaping the uses cardholders associate with debit—many consider
it an ATM card for domestic use that
can also be used to pay for things. As the
cost of cards increases, ATM withdrawals continue to be a cost item, and interchange levels decrease in most countries,
Differentiation. Banks will albanks have to wonder if the quest for
ways strive to provide more functionmore transactions is all they can do
ality at a higher fee. Not all customers,
with debit.
Figure
for instance, require an internationally
There are1 levers banks can pull to
accepted, internet- and mail-order-enexploit
the of
marketing
value of and
debit
Growth
Debit, Consumption
GDP
abled card. Around 40 percent of debit
cards. And already banks across Europe
Y/Y Change
are showing the way—less in the large Debit valuecards issued are not in use at all, and a
GDP
mature banking markets and more so Food large share of active cards is used in limNon-food
ited ways. Why not tier the offering?
in Iberia, the Nordics, Turkey and CenFor example, offer national, European
tral and Eastern Europe. In these counand global cards, or POS versus ATM
tries, banks are pulling five levers:
cards, or offline versus online-enabled
Segmentation. Across all industries,
cards and price those with higher funccustomers do not want to be treated
tionality differently. As a side effect, this
alike. Communities and affiliations
also increases the delineation between
have become more important and endebit and credit cards and makes credit
hance traditional sociodemographic
card cross-selling easier.
segmentation approaches. It goes withEnrichment. More possibilities exout saying that cards as a bank‘s only
ist to earn higher annual fees. For extouch-and-feel product are well suited
ample, charge more for design options
to respond to affinity marketing—both
(picture cards, different shapes), insurvisually and in terms of functionality.
ance packages (purchase protection,
For instance, issuers in Iberia have emtravel insurances), instant or pre-agreed
braced this concept and offer a wide
credit facilities, or loyalty options. This
range of affinity cards. In one case, a fastrategy is already well underway in
mous sports club offers five different
some countries, for instance, in Cencards
for
people
with
different
affiliaFigure 2
tral and Eastern Europe where these eltions.
Figure
Retail Payment
Pattern
Retail2:Payment
Pattern in
Europein Europe
Significant need
• >1,000 yearly payments per person
• 60-80% paid in cash
• Every second transaction is low value
Key role for debit
• Everyday spending
• Low cost
• Fast check through/check-out
… likely through contactless or mobile payments
Card payment
Non-cash payments (credit transfer, direct debit, cheque)
Cash payments
Source: A.T. Kearney analysis
1
ements are typically offered as optional
add-ons across the entire card portfolio.
New uses. Without doubt cardholders want to use their cards to pay.
There are manifold opportunities to
make (debit) cards more versatile in
their core. More than 50 of such solutions have been identified across
Europe, of which 10 to 15 will most
likely find sufficient user demand to
allow for a reasonable profit potential.
They range from bill payments (in
the non-direct-debit markets), paying
traffic tickets, making card-to-card
payments to ticketing solutions.
Card life cycle. With customers getting more free checking accounts in
many places, and debit cards being issued for all of these accounts, it is getting more important than ever for
banks to manage the life cycle of their
debit cards. Activating cards within
the first 90 days is key to staying in the
wallet. But also active cardholders frequently exhibit legacy usage patterns:
too many cash withdrawals, almost no
cross-border usage, no card payments
below €50, as examples. Measures to
resolve this do not have to be costly. Although loyalty programs are rather cost
prohibitive in debit, sending information (for example, via statement imprints) and a targeted communication
to priority customers can make a difference.
From this discussion there is just
one conclusion: Product management
and positioning is essential to capturing additional revenue opportunities. It
is not enough to simply increase transactions. Positioning will be even
3
more important in the emerging European debit landscape, characterized by a multitude of card schemes.
There are around 15 formerly domestic schemes, some with cross-border intentions, new initiatives such
as Monnet, EAPS or V PAY, and the
­incumbents Maestro and Visa Debit.
While it is questionable what array of
choice is actually beneficial to cardholders, merchants and issuers, experience has proven that in a world of
choice branding and positioning determine success.
The Case for Debit Cards
The case for debit cards is actually
better than many would presume
(see figure 3):
• Increasing usage from one card payment per week to one per day. Only
doubling the number of transactions
would provide an additional €5 per
card and year—even with an interchange rate at current U.K. levels.
• Pay by card on trips. If every European travelling abroad would make
two card payments per trip rather
than withdrawing cash (often at
home), banks would gain another
€2 per card (interchange, ATM
cost savings).
• Segmentation, differentiation and en-
Figure 3: Debit Profitability Perspective in €/Card
>8-18
>1
-2 to 8
>2
>2
>>5
Today
Usage
Abroad
Annual fees
VAS
Tomorrow
Source: A.T. Kearney analysis
richment of card functionality could
add another €3 or more from payment and service commissions, assuming that every fifth cardholder
takes up these offers.
No doubt capturing more revenues
will require investment in product
management, customer education,
and customer relationship management campaigns around activation
and usage. Such initiatives do not
have to be costly or overly sophisticated, but are required to overcome
deep-rooted legacy perceptions about
debit card usage. The more costly
part, with a mid-term break-even, is
expanding the acceptance infrastructure to the typical low-value payment
segments, which in some countries
will require joint initiatives by issuers
and acquirers. But this is necessary to
capture everyday spending and promote a step-change in card usage.
The estimated upside of €10 per
card and year is significant for two
reasons: Every current account holder
is also a debit cardholder, thus providing a sizable increase in individual
card profitability. And it responds to
the continued pressure on the fourparty model (cardholder-issuer-acquirer-merchant) and its economics.
This will not only require individual banks to work on their debit card
portfolio, but also for the industry to
promote a step-change in card usage
at fair economic conditions.
Authors:
Andreas Pratz is a partner in the Munich office. He can be contacted at [email protected].
Ralf Baldeweg is a principal in the Berlin office. He can be contacted at [email protected].
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